Funding a Buy-Sell Agreement with Life Insurance

Life Insurance to Fund Buy Sell AgreementsLife rarely goes according to plan. An unexpected death, disability, divorce, or another event can derail a business and create a huge financial impact on its success. Your business is likely your biggest investment and the future resource for funding your retirement.

All businesses should prepare for a multitude of issues that could put the future of the business in danger. For instance, who would manage/own the business upon retirement or unexpected death/disability of an owner?  Is there an internal candidate who is experienced enough to manage the business, or would the business need to be sold to an outside competitor? What about your family’s needs regarding the business?

A buy-sell agreement is an excellent solution to this risk. It is simply a “will” for how you want the business to transition on Your Terms based on certain triggers such as retirement, death or disability.

There are options for funding a buy-sell agreement, but some options open the door to other problems.

  • A company savings account would pay cash when an owner dies, but if death unexpectedly occurs, there may not be enough funds in the account to carry the business.
  • A loan could be obtained at the time. Unfortunately, interest could be high and it may create unnecessary risks for the surviving owners and business.

The best option to fund a buy-sell agreement is a life or disability insurance policy. These types of policies allow for instant cash/liquidity to be used in either continuing the business or preventing a fire sale, allowing proper time for a buyer to be found. Other advantages include: death benefits proceeds are generally income tax free, funds are purchased for pennies on the dollar, and premiums are likely to be significantly lower than loan interest.

Life insurance also offers the option of a Cross-Purchase Plan or an Entity Plan. In a Cross Purchase Plan, each owner purchases a life insurance policy on all other owners and is named beneficiary. In an Entity Plan the business purchases a life insurance policy on each owner and is named beneficiary of plan allowing the business to buy shares stock redemption style, preventing other owners from paying out of pocket.

Both a Cross Purchase Plan and an Entity Plan offers flexibility such as:

  • Price fixing, formula, or appraisal (most important! Establish fair market value of stock or business at time of agreement.)
  • Pay in cash or installment.
  • Different terms for different events (different prices for retirement, death, disability, etc).

Having a buy-sell agreement is imperative. Preparing one in advance eases negotiations and agreements as no one is sure what the next day will bring.

If you would like more information on how a life insurance product could fit into your business plans, contact Abbey Bowersox today at 727.522.7777 or by email at abowersox@w3ins.com.

 

How Much Life Insurance Do I Need?

shutterstock_71485084Several factors go into knowing how much life insurance is right for you and your family. The goal is to keep your family living in their current lifestyle. Some things to look at include current debt, expenses, retirement savings, and current/future income.

Since there are many things to take into consideration, let’s break them down into three sections.

Family Needs – There would be immediate financial obligations should you pass away. These include final expenses, any unpaid medical expenses, outstanding mortgage and other debts. Next, you will need to determine how much income is needed to sustain your family on a monthly basis. What are your current monthly expenses? If you or your spouse is a stay-at-home parent, you may have extra expenses to accommodate for. Did you know that, according to  Salary.com, the average estimated salary of a stay at home mother was $118,905 in 2014. This is just something to think about when reviewing expenses. Daycare, cleaning, food and other expenses would likely increase to accommodate that change.

Future Obligations – You must also think of any future financial obligations. College tuition and fees for your children is an important cost to factor into your planning. Perhaps you planned on paying for your daughter’s wedding. Maybe you would like to contribute to your spouse’s retirement and make sure that he or she is able to retire once your income has ceased.

Available Resources – Take a look at your current accounts. Do you have savings accounts, 401ks, IRAs, 529 college plans, etc? The value in these accounts all factor into the amount of life insurance that you would need.

This can all seem pretty overwhelming. Luckily, LifeHappens.org has a great online calculator that can help you determine how much life insurance to purchase. This is a great starting point on determining how much life insurance is needed.

Once you have gone through the online calculator to help determine the amount of insurance needed, your life advisor can help you find the most cost-effective life insurance program to cover your needs. Contact Abbey at 727-522-7777 x150 today for a life insurance quote.

Ready for your personalized quote?

Children’s Life Insurance: Insuring Their Insurability

Children's Life InsuranceParents all over the world have one thing in common; we love our children more than we love ourselves. The smiles that melt your heart, the injuries that make you want to kiss away the pain—we would do any and everything to protect our precious little ones. What about insuring them for the unthinkable? No parent wants to think about their child becoming ill, or worse. As responsible parents, our duty is to prepare for all possible outcomes.

When a parent purchases a child life insurance policy early in life, they are ensuring their child’s insurability. Buying life insurance on a child will remove the following obstacles, each of which will increase their rates or even render them uninsurable if they were to apply once they were older.

  • Developing an adverse medical condition
  • Tobacco use
  • Avocation & Occupation factors
  • Family History – heart disease, cancer, etc.

Children who develop medical conditions will most likely not qualify for life insurance policies later in life, or, at the very least, their premium will increase. Juvenile diabetes is an excellent example. Many who are diagnosed before the age of 10 are now uninsurable. Your children may one day thank you for allowing them to have their own life insurance policy in the event they do become uninsurable. We have a client who shared a story about how her parents purchased a life policy for her when she was a child. Five years ago she had a kidney transplant which left her ineligible for life insurance. She had her first child last year and now, because of the life policy her parents purchased for her, she has protection for her income. Her parents never thought a simple decision made thirty years ago would have helped her in such a profound way.

Simplified Issue, whole life policies start at $7 a month for children below 5 years old. Protect your child’s future by calling us today.